Westpac chief warns of world financial market correction

By Clancy Yeates

One of Australia's most senior bankers believes global financial markets may face a "meaningful" correction similar to the 1994 bond crash, because aggressive monetary stimulus is inflating asset bubbles.

Rob Whitfield, the chief executive of Westpac's institutional bank, on Thursday warned that bubbles were forming as global investors took on more risk in search of higher returns.

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Photo: Peter Braig

But he stressed that this did not mean the world faced another global financial crisis, because key vulnerabilities had been addressed and banks and economies were more able to cope with shocks.

Speaking in Tianjin, China, Mr Whitfield said central bank moves to stimulate growth had created "a wall of liquidity," which had in turn triggered a global hunt for yield reminiscent of conditions before the 1994 bond crash.

Rob Whitfield leaves a significant hole in Westpac's executive ranks given his experience at the Sydney-based bank as well the strong performance of his Westpac Institutional Bank division.

Photo: Natalie Boog

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"I predict a future market correction; perhaps even a meaningful one," he said in an organised debate with other executives and experts at the World Economic Forum.

"Credit spreads are narrow, forcing a move by many into higher risk assets - junk bond yields are at all-time lows. Asset bubbles are emerging - US share markets have posted successive record highs in recent times despite tapering and mixed economic results.

"It is my view that the current environment is ripe for a market correction that both looks and feels like what we experienced in 1994."

In the 1994 bond crash, US Treasury bond yields surged suddenly after being pushed down by recession and low inflation. Bond yields and prices move inversely.

When the US Federal Reserve responded by raising rates, yields on bonds around the world jumped, pushing up borrowing costs. If this occurred today, there is a risk it could damage the global economy.

Mr Whitfield highlighted the similarities between conditions today and those of 1994.

Historically, he said asset bubbles had "largely arisen during periods of ultra-accommodative monetary policy, combined with sustained periods of low interest rates and an ever-increasing supply of money - sound familiar?"

Mr Whitfield did not specify how far he believed asset prices may fall, but "correction" generally refers to a fall of 10 per cent or more.

Central banks faced a challenging task in trying to "normalise" conditions, he said, because keeping rates low created risks, but moving interest rates too quickly could also damage the economy.

If moves to raise rates did harm growth, he said it would likely result in a "normal," or possibly a "meaningful" correction, with prices falling to more sustainable levels.

He made the comments as part of a debate with several other finance executives and experts on whether the world inevitably faced another global financial crisis.

Mr Whitfield argued that a GFC that froze credit markets was not inevitable, because regulators were more prepared and banks faced tougher supervision and scrutiny.

"The failures that perpetuated the recent crisis today no longer exist and our ability to withstand serious shocks is much stronger," he said.

Mr Whitfield's comments follow a string of high-profile warnings over the surge in asset prices caused by monetary stimulus.

Reserve Bank governor Glenn Stevens has repeatedly warned about the surging property market, and last week he said it would be "unwise" to try to strengthen the economy by allowing house prices to rise further from "already elevated" levels.

ANZ chairman David Gonski last week said there would "come a time" when there was a correction in house prices, and anyone who bet prices would always rise was a "fool."

And the chairman of the government's financial system inquiry, David Murray, last month said the banking system needed to be ready for an inevitable correction in asset prices.

"The ­post-crisis monetary ­settings have distorted asset prices again," Mr Murray said. "That is going to cause a correction at some point, which will put more ­political pressure on financial systems."